Business World
My colleague, Ms. Margarita D. Gonzales, and I just gave an update on the Philippine fiscal picture in light of recent announcement by the Department of Finance of the end-October numbers to fund managers and holders of Philippine RoPs, who are subscribers to Global Source, a network of independent analysts. This is what I told them:
- The headline clearly is we have already breached government's full- year deficit ceiling (P250 B, 3.2% of GDP) with the year-to-date deficit already at P266.1 billion.
' The national deficit continued to widen as revenues weakened - down 7.6% yoy in October (down 4.8% Jan.-Oct.), still due to an economic slowdown and, more so, tax-reducing measures (e.g., lowered corporate income tax, minimum wage exemptions, reversion to franchise taxes in lieu of other taxes for electricity transmission).
' BIR collections declined again in October (down 5.1% yoy Jan.- Oct.) while BOC collections fell considerably during the month (down 15.7% yoy Jan-Oct ).
- The finance secretary's official comment has been that the department will continue to work harder and endeavor to be more effective in implementing our tax administration measures, hoping that Congress will also support them in their bid for revenue enhancement measures that can bring in sustainable sources of revenues for the government.
' Finance department now expects a P280 B deficit (3.6% of GDP) factoring in sale of SMC shares, but without that , about P300 B (3.8% of GDP)
- Here at GlobalSource Philippines, we are sticking to our assessment made in our last quarterly outlook report. The breach of the official target is in line with our expectations as we look to a number closer to 4% of GDP in 2009 (about P310 B).
- Unfortunately, there is little hope now for narrowing this year' s fiscal gap:
' One, because of the recent typhoons/floods, collections can be expected to weaken further (with calamity losses tax-deductible and possibly some leniency for humanitarian reasons) while there is now even greater pressure for the government to continue spending (for reconstruction and rehabilitation).
' Two, the touted improvement in administrative measures are not expected to add that much to the equation.
' Three, the SMC sale, expected to yield P50 billion or almost one percent of GDP, which is what the government is banking on, involves legal hurdles over ownership. This is a case that has been pending for years, and unlikely to be decided before yearend.
' Also, prospects are weak for other planned privatizations judged by the recent bid failure of a Metro Manila property (FTI complex in Taguig) and the loud protestations by politicians over alleged possible midnight asset sales by an outgoing administration (including protests over the sale of a supposedly hicstorical property in Fujima, Japan).
' Finally, we already see a narrowing (if not closed) window for passage of tax reforms (especially new measures) over the next few months given the May 2010 elections. In fact, it would be best if nothing comes out of this Congress. Why? Given we are already in election season, the risk is that what comes out will be the exact opposite of what is needed as what happened with the Comprehensive Tax Reform package in 1995.
y A good example of a bad measure is recently proposed legislation by an influential congressman, which seems to have the support of the finance secretary, to encourage voluntary advance tax payments to generate P100 billion for flooding reconstruction by offering a discount to the taxpayers. This kind of revenue anticipation, apart from causing confusion in government finance statistics time series data, can only cost government more than if it simply borrowed from a very liquid debt market. Clearly, for taxpayers to find this attractive, the discount government needs to give will have to be at least equal to taxpayers' cost of borrowing, which is much higher than government's own cost of borrowing.
- Now, let us let us look at the prospects for 2010:
' We note that government is sticking to its existing deficit target (P233.4 B, 2.8% of GDP).
' We however are not so optimistic that this is achievable (will likely still breach 3% of GDP given the circumstances, e.g., still tepid growth, lack of needed new tax measures).
' Notably, the tax effort ratio could shrink to pre-2006 levels this year, i.e., the range just prior to the introduction of the expanded VAT, and significant improvement will definitely require that new fiscal reform measures be implemented.
- But, as we had stated in our latest quarterly report, we aren't that worried about the impact on financial markets for a few reasons:
' The continued high level of remittances (up 8.6% in Sep, up 4.2% Jan-Sep, defying previous expectations of a decline) as a robust current account allows a healthy amount of dollar borrowing (enough to calm the peso bond market, and allowing even a pre- funding of next year's requirements) while keeping liquidity conditions loose.
' A deficit of the size currently expected has already been factored in by the markets for 2009 with the consensus that such is manageable.
' Though the deficit will likely not narrow by much next year, it would still be an improvement over this year's fiscal gap ;and we have greater hopes that reform measures can be successfully pushed with the entry of a new and more popular administration.
- In short, while emerging fiscal concerns are certainly daunting with the poor state of government finances and embedded revenue and spending millstone, the new political environment gives us a promising window to animate the country/economy and improve growth potentials over the next six years helping the new government to achieve hoped-for medium-term fiscal consolidation (i.e., reining in future deficits and bringing the debt ratio back on a downward trajectory).
Mr. Romeo Bernardo is Global Source Philippine advisor and board member of The Institute for Development and Econometric Analysis, Inc. He was formerly undersecretary of Finance during the Aquino and Ramos administrations.
Monday, November 23, 2009
Friday, November 13, 2009
Crude solution
Business World
Introspective
Acouple of weeks ago, President Gloria Macapagal-Arroyo issued an executive order that turned back oil prices in Luzon, which has been placed under a state of calamity, to where they were on October 15 as relief to typhoon victims. This added to an already long list of price controls temporarily placed in typhoon-stricken areas on items ranging from rice to sardines to funeral services.
The cap on fuel prices unleashed the sharpest response from the business sector, largely because of the history behind oil price controls. The industry was deregulated only in the late 1990s, and memories of shortages such a policy produced remained fresh in people's minds, not to mention the enormous subsidy cost of trying to stabilize prices.
Local business groups and foreign chambers of commerce have railed against the imposed measure. Their arguments were hard to refute - price controls would only distort supply, spur shortages, create a black market (and black market prices), lead to profit losses for oil firms, and discourage investment. Those who showed some support for the wielding of state powers highlighted the need for it to be used sparingly and within a very limited time.
Even the central bank has spoken up on the issue. A deputy governor of the Bangko Sentral ng Pilipinas (BSP) warned the public on the dangers of price controls, which he said created market distortions and affected availability of supply in the long run. A Palace economic adviser has also weighed in on the issue, arguing how price caps on petroleum products disproportionately benefited the well-to-do and resulted in revenue losses of as much as P4.5 billion (from VAT and income taxes), while opining how it was much sounder for the government to just target help to typhoon victims (e.g., through diesel discounts, discounted fuel access cards for lower-to-middle- income families, and income transfers to the poor).
But the President has kept distance from the debates, leaving it to a task force led by the energy and justice departments to decide whether or not price controls should be lifted. The task force has been meeting with the private sector but says it will need to wait for the verdict of the National Disaster Coordinating Council (NDCC) on how soon the emergency situation can be expected to end. With its hands-off policy, the Palace will also likely let the courts defuse tension, as one of the Big Three (Pilipinas Shell Petroleum Corp.) has questioned the legality of EO 839 and asked for its lifting.
The capping of oil prices may be perceived as merely a well- intentioned but wrong-headed policy designed to ease the plight of calamity victims. However, the lack of a clear effort toward consensus-building hints at a less straightforward agenda, not the first time that the country's leader would play to the gallery (e.g., less than full recovery of power costs until 2004, brief suspension of automatic indexation of water tariffs, and freezing of toll fees).
Apart from failure to confer with industry players, only a few Cabinet officials had apparently been closely consulted in crafting the measure, with the puzzling omission of the secretaries of energy, finance and economic planning and the central bank governor.
At the moment, there is a battle of wills between oil companies and government. Oil companies threaten shortages and shutdowns, while government officials and administration lawmakers warn of the full force of the law. One Palace insider describes the mood in the corridors of power as pregnant with petulance.
The danger is, the longer this is allowed to drag, the messier it becomes for the local fuel market, the harder to unwind, and the worse for the economy in general. Already, arbitrage and shortages are being reported in certain areas in Luzon where oil firms allege they have to sell at a loss, while complaints have been made about escalating prices elsewhere in the country.
The sector to watch out for is LPG (also used for household cooking), a sensitive market that will likely be the first to take a hit because of the weak financial muscle and low profit buffers of independent players who together hold more than a fifth of market share. LPG retailers have threatened to stop sales if price caps continue until December.
Inflation also becomes harder for monetary authorities to manage if the present situation continues, explaining BSP's timely take on the issue. As one central bank official cryptically confided to friends, maybe [the] measure is temporary but caution ensures it will not be permanent. Local pump prices have kept relatively steady despite the rise in world prices purportedly as a result of price wars, but will later have to follow global trends. Keeping rates below market level for a long time will only lead to price surges when ceilings are removed.
For the longer term, the present episode could mean a dilution of the oil deregulation law which the Ramos government took pains to establish. Already, Congress is looking for ways to amend the law and widen the powers of the state to correct abuses especially during special circumstances (e.g., by raising the transparency of price-setting, spurring competition by building up smaller players, or bringing back some form of price regulation).
The quickest break to the impasse would be if both government and oil players agree on a compromise - a discount for typhoon victims perhaps, as what seems to be the emerging consensus, or limiting the measure to highly distressed areas with an agreement to gradually phase in price increases elsewhere in Luzon. The NDCC could also decide that a state of calamity no longer holds, making any court case against the freezing of oil prices academic. Otherwise, oil firms could simply wait for the court system to grant a restraining order on the measure which should not be too long though the relief will be temporary.
The above scenarios still offer the administration a graceful exit from the self-inflicted dilemma.
Government trumpeters have repeatedly assured that price measures will generally be geographically, temporally, and legally bound, but the truth is how long caps on oil prices in particular can last depends entirely on the President. In the meantime, inventories have been dropping as oil importers begin to cancel scheduled purchases - from the usual three weeks to less than two, according to the energy secretary - creating a possible backdrop, some speculate, for a state-led fuel allocation plan. Listening to industry experts, one gets the feel that the longest major players can survive this game is two months and the smaller players maybe just one. Government could of course try to maximize brownie points and stretch oil firms to their limits before it finally folds its cards, but this would be at a great cost ultimately.
(This column is based on a GlobalSource report written for international fund managers entitled Crude Solution, co-authored by Margarita D. Gonzales.)
Romeo Bernardo is board member of The Institute for Development and Econometric Analysis and is managing director of Lazaro, Bernardo, Tiu and Associates, Inc.
Introspective
Acouple of weeks ago, President Gloria Macapagal-Arroyo issued an executive order that turned back oil prices in Luzon, which has been placed under a state of calamity, to where they were on October 15 as relief to typhoon victims. This added to an already long list of price controls temporarily placed in typhoon-stricken areas on items ranging from rice to sardines to funeral services.
The cap on fuel prices unleashed the sharpest response from the business sector, largely because of the history behind oil price controls. The industry was deregulated only in the late 1990s, and memories of shortages such a policy produced remained fresh in people's minds, not to mention the enormous subsidy cost of trying to stabilize prices.
Local business groups and foreign chambers of commerce have railed against the imposed measure. Their arguments were hard to refute - price controls would only distort supply, spur shortages, create a black market (and black market prices), lead to profit losses for oil firms, and discourage investment. Those who showed some support for the wielding of state powers highlighted the need for it to be used sparingly and within a very limited time.
Even the central bank has spoken up on the issue. A deputy governor of the Bangko Sentral ng Pilipinas (BSP) warned the public on the dangers of price controls, which he said created market distortions and affected availability of supply in the long run. A Palace economic adviser has also weighed in on the issue, arguing how price caps on petroleum products disproportionately benefited the well-to-do and resulted in revenue losses of as much as P4.5 billion (from VAT and income taxes), while opining how it was much sounder for the government to just target help to typhoon victims (e.g., through diesel discounts, discounted fuel access cards for lower-to-middle- income families, and income transfers to the poor).
But the President has kept distance from the debates, leaving it to a task force led by the energy and justice departments to decide whether or not price controls should be lifted. The task force has been meeting with the private sector but says it will need to wait for the verdict of the National Disaster Coordinating Council (NDCC) on how soon the emergency situation can be expected to end. With its hands-off policy, the Palace will also likely let the courts defuse tension, as one of the Big Three (Pilipinas Shell Petroleum Corp.) has questioned the legality of EO 839 and asked for its lifting.
The capping of oil prices may be perceived as merely a well- intentioned but wrong-headed policy designed to ease the plight of calamity victims. However, the lack of a clear effort toward consensus-building hints at a less straightforward agenda, not the first time that the country's leader would play to the gallery (e.g., less than full recovery of power costs until 2004, brief suspension of automatic indexation of water tariffs, and freezing of toll fees).
Apart from failure to confer with industry players, only a few Cabinet officials had apparently been closely consulted in crafting the measure, with the puzzling omission of the secretaries of energy, finance and economic planning and the central bank governor.
At the moment, there is a battle of wills between oil companies and government. Oil companies threaten shortages and shutdowns, while government officials and administration lawmakers warn of the full force of the law. One Palace insider describes the mood in the corridors of power as pregnant with petulance.
The danger is, the longer this is allowed to drag, the messier it becomes for the local fuel market, the harder to unwind, and the worse for the economy in general. Already, arbitrage and shortages are being reported in certain areas in Luzon where oil firms allege they have to sell at a loss, while complaints have been made about escalating prices elsewhere in the country.
The sector to watch out for is LPG (also used for household cooking), a sensitive market that will likely be the first to take a hit because of the weak financial muscle and low profit buffers of independent players who together hold more than a fifth of market share. LPG retailers have threatened to stop sales if price caps continue until December.
Inflation also becomes harder for monetary authorities to manage if the present situation continues, explaining BSP's timely take on the issue. As one central bank official cryptically confided to friends, maybe [the] measure is temporary but caution ensures it will not be permanent. Local pump prices have kept relatively steady despite the rise in world prices purportedly as a result of price wars, but will later have to follow global trends. Keeping rates below market level for a long time will only lead to price surges when ceilings are removed.
For the longer term, the present episode could mean a dilution of the oil deregulation law which the Ramos government took pains to establish. Already, Congress is looking for ways to amend the law and widen the powers of the state to correct abuses especially during special circumstances (e.g., by raising the transparency of price-setting, spurring competition by building up smaller players, or bringing back some form of price regulation).
The quickest break to the impasse would be if both government and oil players agree on a compromise - a discount for typhoon victims perhaps, as what seems to be the emerging consensus, or limiting the measure to highly distressed areas with an agreement to gradually phase in price increases elsewhere in Luzon. The NDCC could also decide that a state of calamity no longer holds, making any court case against the freezing of oil prices academic. Otherwise, oil firms could simply wait for the court system to grant a restraining order on the measure which should not be too long though the relief will be temporary.
The above scenarios still offer the administration a graceful exit from the self-inflicted dilemma.
Government trumpeters have repeatedly assured that price measures will generally be geographically, temporally, and legally bound, but the truth is how long caps on oil prices in particular can last depends entirely on the President. In the meantime, inventories have been dropping as oil importers begin to cancel scheduled purchases - from the usual three weeks to less than two, according to the energy secretary - creating a possible backdrop, some speculate, for a state-led fuel allocation plan. Listening to industry experts, one gets the feel that the longest major players can survive this game is two months and the smaller players maybe just one. Government could of course try to maximize brownie points and stretch oil firms to their limits before it finally folds its cards, but this would be at a great cost ultimately.
(This column is based on a GlobalSource report written for international fund managers entitled Crude Solution, co-authored by Margarita D. Gonzales.)
Romeo Bernardo is board member of The Institute for Development and Econometric Analysis and is managing director of Lazaro, Bernardo, Tiu and Associates, Inc.
Monday, November 2, 2009
Oil price controls
Business World
Introspective
The administration recently issued the controversial and poorly studied Executive Order 839 imposing price controls on oil. Economists and industry analysts have observed that, hand in hand with rampant oil smuggling, which an IMF paper euphemistically referred to as underdeclaration of imports due to election-related lenience in 2007, this will encourage full bloom of black-marketing and corruption with the coming 2010 vote.
To provide general background on the issue, the author thought it useful to share the section on Oil Deregulation of a study on the Political Economy of Reform During the Ramos Administration done by Christine Tang and him for the World Bank Growth Commission in 2008. The full report which also covers Water Privatization and Telecom De-Monopolization can be accessed via the following link http://www.growthcommission.org/storage/cgdev/documents/gcwp039web.pdf.
If there is proof of political will on the part of the Ramos presidency or of any other Philippine presidency, let this new oil deregulation law be the proof of that.... - Statement of Fidel V. Ramos. Enactment into law of R.A. 8479, Feb.10, 1998.
The deregulation of the downstream oil industry involved the highly politicized issue of liberalizing oil pricing. Three important considerations were (i) a long history, dating back to the 1970s, of civil disturbance related to oil price adjustments; (ii) the cost was going to be spread out across a wider segment of the population, including well organized, low-income groups such as transport groups that in the past partly paralyzed Metro Manila through transport strikes; and (iii) legislation was required to enact liberalization. Thus, from the start, the Ramos government focused on managing potentially broad opposition to the reform.
Efforts to deregulate the industry started as early as 1993. The Ramos administration launched a nationwide public information campaign to educate people about the workings of the oil market and allay fears of spiraling prices after deregulation. Public acceptance of (or at least reduced resistance to) the proposal was deemed important to get the congressional nod for proposed legislation to deregulate the industry. The Ramos government also committed the reform measure under the country's program with the IMF to help set a timeframe for passing legislation.
Although government officials related that they encountered very little resistance during the nationwide roadshow, what is interesting about this reform experience were the actions of the veto players - the legislature and the judiciary.
As the initial spadework on the proposed bill led up to the May 1995 congressional and local elections, work had to be put on hold as the likelihood of getting congressional approval became slim. While certain nationalist members of the legislature continued to strongly oppose the proposal when Congress resumed in July 1995, the LEDAC mechanism proved invaluable in speeding up congressional approval of the bill. An oil deregulation law was enacted and was in force for roughly 18 months starting in April 1996. During that period, a fully deregulated regime, with the oil companies free to adjust oil prices, had been gradually phased in. In November 1997, in response to a petition by a group of congressmen who had voted against the bill, the Supreme Court declared the law unconstitutional.
At the time, the Philippines was already four months into the Asian crisis. With the peso having lost a quarter of its value, which pushed up domestic oil prices, the Ramos administration was under renewed pressure to reregulate the industry. Nevertheless, the president persisted in pursuing the reform both by trying to get the Supreme Court to reverse its ruling and by asking Congress to pass a new law without the constitutional infirmity cited by the court. President Ramos succeeded in the latter, signing into law the Downstream Oil Industry Deregulation Law in February 1998.
The benefits of oil deregulation became evident during the most recent run-up in world oil prices. The full pass-through of world oil price increases to domestic oil prices helped to shield the fiscal sector from the burden of providing oil subsidies at a time when government finances were most fragile. Other benefits have included (i) increased competition in the industry with the entry of new players; (ii) less politicization of oil pricing; (iii) proper market response to high oil prices, including conservation and the search for substitutes like biofuels; and (iv) clean and good restrooms at service stations all over the country as a by-product of introducing competition in the industry, helping support tourism.
Mr. Romeo Bernardo is Global Source Philippine advisor and board member of The Institute for Development and Econometric Analysis, Inc. He was formerly undersecretary of finance during the Aquino and Ramos administrations.
Introspective
The administration recently issued the controversial and poorly studied Executive Order 839 imposing price controls on oil. Economists and industry analysts have observed that, hand in hand with rampant oil smuggling, which an IMF paper euphemistically referred to as underdeclaration of imports due to election-related lenience in 2007, this will encourage full bloom of black-marketing and corruption with the coming 2010 vote.
To provide general background on the issue, the author thought it useful to share the section on Oil Deregulation of a study on the Political Economy of Reform During the Ramos Administration done by Christine Tang and him for the World Bank Growth Commission in 2008. The full report which also covers Water Privatization and Telecom De-Monopolization can be accessed via the following link http://www.growthcommission.org/storage/cgdev/documents/gcwp039web.pdf.
If there is proof of political will on the part of the Ramos presidency or of any other Philippine presidency, let this new oil deregulation law be the proof of that.... - Statement of Fidel V. Ramos. Enactment into law of R.A. 8479, Feb.10, 1998.
The deregulation of the downstream oil industry involved the highly politicized issue of liberalizing oil pricing. Three important considerations were (i) a long history, dating back to the 1970s, of civil disturbance related to oil price adjustments; (ii) the cost was going to be spread out across a wider segment of the population, including well organized, low-income groups such as transport groups that in the past partly paralyzed Metro Manila through transport strikes; and (iii) legislation was required to enact liberalization. Thus, from the start, the Ramos government focused on managing potentially broad opposition to the reform.
Efforts to deregulate the industry started as early as 1993. The Ramos administration launched a nationwide public information campaign to educate people about the workings of the oil market and allay fears of spiraling prices after deregulation. Public acceptance of (or at least reduced resistance to) the proposal was deemed important to get the congressional nod for proposed legislation to deregulate the industry. The Ramos government also committed the reform measure under the country's program with the IMF to help set a timeframe for passing legislation.
Although government officials related that they encountered very little resistance during the nationwide roadshow, what is interesting about this reform experience were the actions of the veto players - the legislature and the judiciary.
As the initial spadework on the proposed bill led up to the May 1995 congressional and local elections, work had to be put on hold as the likelihood of getting congressional approval became slim. While certain nationalist members of the legislature continued to strongly oppose the proposal when Congress resumed in July 1995, the LEDAC mechanism proved invaluable in speeding up congressional approval of the bill. An oil deregulation law was enacted and was in force for roughly 18 months starting in April 1996. During that period, a fully deregulated regime, with the oil companies free to adjust oil prices, had been gradually phased in. In November 1997, in response to a petition by a group of congressmen who had voted against the bill, the Supreme Court declared the law unconstitutional.
At the time, the Philippines was already four months into the Asian crisis. With the peso having lost a quarter of its value, which pushed up domestic oil prices, the Ramos administration was under renewed pressure to reregulate the industry. Nevertheless, the president persisted in pursuing the reform both by trying to get the Supreme Court to reverse its ruling and by asking Congress to pass a new law without the constitutional infirmity cited by the court. President Ramos succeeded in the latter, signing into law the Downstream Oil Industry Deregulation Law in February 1998.
The benefits of oil deregulation became evident during the most recent run-up in world oil prices. The full pass-through of world oil price increases to domestic oil prices helped to shield the fiscal sector from the burden of providing oil subsidies at a time when government finances were most fragile. Other benefits have included (i) increased competition in the industry with the entry of new players; (ii) less politicization of oil pricing; (iii) proper market response to high oil prices, including conservation and the search for substitutes like biofuels; and (iv) clean and good restrooms at service stations all over the country as a by-product of introducing competition in the industry, helping support tourism.
Mr. Romeo Bernardo is Global Source Philippine advisor and board member of The Institute for Development and Econometric Analysis, Inc. He was formerly undersecretary of finance during the Aquino and Ramos administrations.
Monday, October 5, 2009
Fiscal imperative for next administration
Business World
Introspective
As one would expect, there have been a spate of nonpartisan exercises on a road map for the country post 2010 among institutions that have an interest in the long-term development of the country. I have been a participant/resource person in a number of them - including, the ADB, the Makati Business Club and the Ramos Peace and Development Foundation; the last one involving six presidentiables who were invited to present their platforms.
Giving the welcome remarks in the Ramos forum, I noted that while we keenly awaited the expositions of the aspirants, many of us are likely to believe that It is useless to try to hold people to anything they say when they are madly in love, drunk - or running for public office.
This was recently validated by good friend, economist guru Philip Medalla. He said that each time he and his collaborators from the UP School of Economics presented their road map with heavy emphasis on how to raise revenues to finance neglected public spending programs, none would publicly embrace the well-thought-out tax measures they propose, like increase in the VAT rate and oil taxes. The solution of the presidential hopefuls then (which do not include the current two front-runners) almost uniformly was, I will improve collections from the BIR and Bureau of Customs through better and more honest administration.
No one can disagree with the need for collection efficiency and honesty. However, people with first-hand experience with reform efforts in these bureaus will say that while such reforms are an essential component of a credible fiscal program and should thus be pursued with resolute political will - this will take time to yield results.
(Nor can the new government rely on privatization receipts - the bottom has been scraped with the disposal of the remaining 40% government stake in Petron.)
It does not help that the new government will inherit a practically bankrupt government, as newly resigned economic planning secretary Ralph Recto was quoted to have said last month. As a senator, he was principal author of the VAT law that is helping shore up the country's finances. In that interview, he expressed worry over the spending authorized by Congress that is contributing to future spending demands that are unmatched by corresponding revenues, i.e., the large increase in salaries and military pension over the next few years. Add to that the structural erosion in revenues that is embedded in some tax laws both passed and forthcoming (a number with doubtful economic and social justification) and the expected still weak recovery from recession keeping tax collections down. While a fiscal crisis was averted with the expanded VAT law in 2005, we are back on a worsening trajectory on all fiscal indicators, be it tax to GDP, deficit to GDP, or public debt to GDP.
Thus, absent any change in the tax structure and base, administrative reform cannot possibly generate the needed increased revenues. Nor would such a weak and incomplete fiscal program that depended on incremental improvements from administrative measures achieve the credibility demanded by the domestic markets and the international financial community to finance required infrastructure and social spending over the next six years.
We will need front-loading of strong, believable fiscal action- otherwise, it will be a case of too little too late and no money, no honey.
What are the measures that can help generate such levels of money and credibility?
The package advocated by UP economists/professor friends who have also served in senior posts in government (Dante Canlas, Ben Diokno, Philip Medalla ) included: a) reform fiscal incentives; b) reform excise taxes on cigarettes and liquor; c) increase the VAT to 15% while lowering the personal and corporate income taxes to 25%; d) adopt higher/variable tax rates on fuel products.
Items (a) and (b) have been on the legislative agenda of the Department of Finance for over a decade, and is still in the mill in the current Congress. While I have pushed for these in the past, both as a public servant and now as an economic commentator, my wish is that nothing comes out of this Congress. Why? Given that this is now election season, the risk is that what comes out will be the exact opposite of what is needed as had happened with the Comprehensive Tax Reform Package in the 1990s. It is best that the Department of Finance technocrats muster their energies for keeping further revenue erosion bills at bay. (It would be too much to expect a presidential veto when we are prematurely in full election fever pitch.)
Certainly then, (a) and (b) need to be pushed by the next president. All the technical work has been done there. What it will take is political commitment, and political skill.
I also support the proposed increase in VAT to 15% while lowering the personal and corporate income taxes. This move can increase the net take of government from a broad and neutral tax base, while giving a break to honest taxpayers who correctly report and pay their income taxes.
Finally, we need to increase the tax take from oil products, hand in hand with full enforcement of anti-smuggling laws. This can take the form of either a complex variable tariff as advocated by friend Ben Diokno, or a simpler increase in excise tax indexed to inflation, which I prefer. Either way, this will not be easy. The next administration will need to make the public understand that: a) taxes on petroleum products are progressive, i.e., the rich pay proportionately more than the poor - more progressive than excises on tobacco and alcohol and the VAT; b) the Philippines has lower oil taxes compared to most countries at a similar income level; c) the money they are paying will help build infrastructure that will generate investment and jobs, and provide direct assistance to the disadvantaged through social services like education and health.
It will also require determination to implement the law against oil smuggling.
None of these are easy, but not impossible for a new president who has a genuine mandate, has renewed people's hopes, and has the skill to do it.
The candidates do not need to talk of these hard measures at this time. What is needed is a leader who can walk the walk at the right time. A leader able to set the vision, rally the people to bring results in ways that are possible to accomplish at the given time and openings available and working through weak institutions and contending with strong vested interests. (The Political Economy of Reform, Working Paper No. 39, World Bank Commission on Growth and Development, Bernardo and Tang, 2008
http://www.growthcommission.org/storage/cgdev/documents/gcwp039web.pdf).
Mr. Romeo Bernardo is Global Source Philippine advisor and board member of The Institute for Development and Econometric Analysis, Inc. He was formerly undersecretary of Finance during the Aquino and Ramos administrations.
Introspective
As one would expect, there have been a spate of nonpartisan exercises on a road map for the country post 2010 among institutions that have an interest in the long-term development of the country. I have been a participant/resource person in a number of them - including, the ADB, the Makati Business Club and the Ramos Peace and Development Foundation; the last one involving six presidentiables who were invited to present their platforms.
Giving the welcome remarks in the Ramos forum, I noted that while we keenly awaited the expositions of the aspirants, many of us are likely to believe that It is useless to try to hold people to anything they say when they are madly in love, drunk - or running for public office.
This was recently validated by good friend, economist guru Philip Medalla. He said that each time he and his collaborators from the UP School of Economics presented their road map with heavy emphasis on how to raise revenues to finance neglected public spending programs, none would publicly embrace the well-thought-out tax measures they propose, like increase in the VAT rate and oil taxes. The solution of the presidential hopefuls then (which do not include the current two front-runners) almost uniformly was, I will improve collections from the BIR and Bureau of Customs through better and more honest administration.
No one can disagree with the need for collection efficiency and honesty. However, people with first-hand experience with reform efforts in these bureaus will say that while such reforms are an essential component of a credible fiscal program and should thus be pursued with resolute political will - this will take time to yield results.
(Nor can the new government rely on privatization receipts - the bottom has been scraped with the disposal of the remaining 40% government stake in Petron.)
It does not help that the new government will inherit a practically bankrupt government, as newly resigned economic planning secretary Ralph Recto was quoted to have said last month. As a senator, he was principal author of the VAT law that is helping shore up the country's finances. In that interview, he expressed worry over the spending authorized by Congress that is contributing to future spending demands that are unmatched by corresponding revenues, i.e., the large increase in salaries and military pension over the next few years. Add to that the structural erosion in revenues that is embedded in some tax laws both passed and forthcoming (a number with doubtful economic and social justification) and the expected still weak recovery from recession keeping tax collections down. While a fiscal crisis was averted with the expanded VAT law in 2005, we are back on a worsening trajectory on all fiscal indicators, be it tax to GDP, deficit to GDP, or public debt to GDP.
Thus, absent any change in the tax structure and base, administrative reform cannot possibly generate the needed increased revenues. Nor would such a weak and incomplete fiscal program that depended on incremental improvements from administrative measures achieve the credibility demanded by the domestic markets and the international financial community to finance required infrastructure and social spending over the next six years.
We will need front-loading of strong, believable fiscal action- otherwise, it will be a case of too little too late and no money, no honey.
What are the measures that can help generate such levels of money and credibility?
The package advocated by UP economists/professor friends who have also served in senior posts in government (Dante Canlas, Ben Diokno, Philip Medalla ) included: a) reform fiscal incentives; b) reform excise taxes on cigarettes and liquor; c) increase the VAT to 15% while lowering the personal and corporate income taxes to 25%; d) adopt higher/variable tax rates on fuel products.
Items (a) and (b) have been on the legislative agenda of the Department of Finance for over a decade, and is still in the mill in the current Congress. While I have pushed for these in the past, both as a public servant and now as an economic commentator, my wish is that nothing comes out of this Congress. Why? Given that this is now election season, the risk is that what comes out will be the exact opposite of what is needed as had happened with the Comprehensive Tax Reform Package in the 1990s. It is best that the Department of Finance technocrats muster their energies for keeping further revenue erosion bills at bay. (It would be too much to expect a presidential veto when we are prematurely in full election fever pitch.)
Certainly then, (a) and (b) need to be pushed by the next president. All the technical work has been done there. What it will take is political commitment, and political skill.
I also support the proposed increase in VAT to 15% while lowering the personal and corporate income taxes. This move can increase the net take of government from a broad and neutral tax base, while giving a break to honest taxpayers who correctly report and pay their income taxes.
Finally, we need to increase the tax take from oil products, hand in hand with full enforcement of anti-smuggling laws. This can take the form of either a complex variable tariff as advocated by friend Ben Diokno, or a simpler increase in excise tax indexed to inflation, which I prefer. Either way, this will not be easy. The next administration will need to make the public understand that: a) taxes on petroleum products are progressive, i.e., the rich pay proportionately more than the poor - more progressive than excises on tobacco and alcohol and the VAT; b) the Philippines has lower oil taxes compared to most countries at a similar income level; c) the money they are paying will help build infrastructure that will generate investment and jobs, and provide direct assistance to the disadvantaged through social services like education and health.
It will also require determination to implement the law against oil smuggling.
None of these are easy, but not impossible for a new president who has a genuine mandate, has renewed people's hopes, and has the skill to do it.
The candidates do not need to talk of these hard measures at this time. What is needed is a leader who can walk the walk at the right time. A leader able to set the vision, rally the people to bring results in ways that are possible to accomplish at the given time and openings available and working through weak institutions and contending with strong vested interests. (The Political Economy of Reform, Working Paper No. 39, World Bank Commission on Growth and Development, Bernardo and Tang, 2008
http://www.growthcommission.org/storage/cgdev/documents/gcwp039web.pdf).
Mr. Romeo Bernardo is Global Source Philippine advisor and board member of The Institute for Development and Econometric Analysis, Inc. He was formerly undersecretary of Finance during the Aquino and Ramos administrations.
Saturday, September 5, 2009
Life is strange. Riding reflections upon turning 55
Life is strange.
Its been 5 years since, and have travelled with many of you guys all over the country from the Mt Province to Mindanao- plus Borneo (although Amina will say that's really part of the country, or at least the Sulu Sultanate). Its been a great ride, and grateful for your company, not just at the ride, but as Doc Francis said in his birthday greeting sms-- " in this highway called Life". Gracias, los Hombres.
(Incidentally, for those wondering how the name of our egroup "hombres" came to be, this is thanks to Philip who put up our egroup/riders group 3 years ago almost to the day (Sept 19, 2006). He had in mind my sms calls to ride to our group of friends, sometimes addressing everyone "hombres" .... in the style of the cowboy movies ).
Special thanks to our special guests, Jaime, Fernando, Pedro, and Do, for the honor of your presence. It was through the kindness of Pedro that Ibba and I got to own our first BMW, by practically giving it away. Of course, it is thanks to Jaime, Fernando and Do that I was able to afford the subsequent up-grades at market prices!! :^) . Salamat po.
Amina and my non-rider children- Mini and Peppy- joined us today- thank you waking up at an infernal time. We used to ride a lot as a family when I still had the energy to pedal two wheels-- and when there were bike lanes--i.e. in the Washington DC area for ten years.
I thank Amina for caring much to understand this particular mania--and recognizing it as good therapy-- despite my consistent refusal to get extra life insurance as many of you had. (In my case, my refusal was a question of survival. I did not think I ought to provide her with even more incentive than I already do).
Thanks to my buddy, Philip-- my neighbor and co-bad influence. Though we started riding, he has left me far behind in terms of skill level. But then he's at least a decade younger-- or looks like it. And able to ride the rough twisties of the Cordellierias with our other early ride buddy-- my kid brother -Ibba. (Thank you to General Boy for being our first mentor).
Maraming salamat to our guru, my kuya Randy, who by putting into words the meaning and poetry of riding-- and helped us and our loved ones appreciate this "irrationality" -- making it almost understandable to them. And for being around to be poster boy for the Hombres, and making us almost respectable. This is very important for getting visas from many of our wives (though he is in the states, thanks to our 78 year old ride buddy , Brod Pete-- for being our inspiration--- and our aspiration).
And not the least, our commander-- Eric, for planning, organizing, and leading all of our expeditions- with meticulous care and detail -- our "mother hen" as Randy correctly put it-- an officer, a gentleman, a leader-- and occasionally when needed, a mechanic and videoke king. Thank you, Eric, together with our doctor rider buddies, Benjie and Paul, that I am still in one piece at age 55. And equally, thanks to your lovely lady, dermatologist Doc Michelle, who has kept me pretty at 55.
Maraming salamat po.
Monday, August 31, 2009
Thinking about banking sector risks
Business World
Introspective
The latest World Bank Philippines Quarterly Update, Sailing through stormy waters (July 2009), has some good news to tell. Tucked among pages discussing the country's expected poorer economic prospects this year is a box that begins with the conclusion that alert levels on the Philippine banking system have come down over the past six months. This is a relief for many who late last year had been bracing for more contagion from the US financial turmoil.
Transmission of turbulence from developed markets to local shores in the September/October period last year had mainly come through falling prices of dollar-denominated Philippine government securities (popularly called ROPs) that comprise an important portion of bank assets.
Notwithstanding this generally favorable conclusion, the report observes that banks continue to have a large exposure to interest rate risks with about P700 billion, representing 12% of total assets, subject to fair value accounting. For a 100-basis-point increase in spreads on all types of government securities, it is estimated that banks can potentially lose about 50 to 70% of average annual profits on account of lost value from government security holdings.
This consideration provides yet another important reason why Philippine fiscal authorities have been quite cautious in joining full steam the fiscal stimulus bandwagon. The other reasons being the more generally known effect of high interest rates (and thus debt service) in crowding out essential public social and infrastructure spending, and in discouraging private investments and job creation. (Finance officials have been emphatic on their having a medium-term fiscal program that tries to bring back the debt-to-GDP ratio to a downward trajectory by steadily bringing the deficit from 3.2% of GDP [P250 billion] this year, back to near balance by 2013.)
The World Bank Quarterly update likewise observes that concerns over market and liquidity risks have given way to worries about credit risk that follows weaker economic prospects. Bankers I've talked to tell me that they are already seeing upticks in default rates in industries that have been directly affected by the economic downturn. These include exporters and overseas workers and their families who have taken out loans to purchase homes in the Philippines. Of the two, housing loans appear to be more worrisome as this has been an important growth area in past years, having benefited from the rapid remittance growth.
Nevertheless, the continuing growth in remittances offer comfort (as well as the fact that Filipinos put great store on housing investments and can be expected to keep up mortgage payments - even dipping into savings - for as long as possible).
While the entire real estate sector is being watched closely for potential problems, a collapse similar to what happened in the aftermath of the 1997 Asian crisis can be ruled out; most real estate companies today are profitable with relatively low debt ratios.
Some of the big real estate firms, e.g., Ayala Land, Megaworld, have also started to rely less on banks for financing, instead tapping lenders directly with bond issuances. Any remaining bank financing had been done against company balance sheets rather than project cash flows, adding a layer of protection for banks. Meanwhile, a new mode of housing finance, based on developers' contracts to sell, have been done with recourse to developers, minimizing risk to banks.
Apart from real estate, another area which has shown dramatic growth in bank exposure has been the power sector. This is driven in part by real need to invest in capacity after years of under-investment in this sector, and in part by financing for the acquisition of plants being privatized by government.
By and large the lending has been to borrowers with good credit rating and good track records in operating in this industry. What is needed to make sure these chunky loans perform well is the maturing of the regulatory environment. This includes, the functioning of the Energy Regulatory Board, so that it's rate setting does not get politicized (even as we enter a political season), and tweaking the operations of the Wholesale Electricity Spot Market (WESM) to more fully reflect true electricity supply/demand conditions. (Ditto for loans to the water sector and the sometimes idiosyncratic regulatory regime governing it.)
Another somewhat related and more long-term concern is increased concentration of lending to conglomerates, something that the World Bank report also mentioned.
An example of this is San Miguel's venture into regulated industries such as oil, power, and water that require lumpy investments that need to be financed.
Although a large chunk has been borrowed from the capital markets, banks have also bought these bonds adding to their exposures to San Miguel. While the single borrower's limit mitigates against concentration risk, banks will increasingly find it hard to find other lending outlets to diversify risk.
The report further observes that risks that may eventuate in a scenario of low growth are drags on banks' earnings resulting from a more difficult operating environment that will see banks' interest rate margins squeezed, loan growth decelerating, and cost of lending rising.
This setting may also test the appropriateness of individual bank capital in terms of covering unexpected losses and/or higher risk taking. While the big banks may have no problem raising capital in the current environment of high liquidity, the smaller banks may find it more difficult - and could result in pressure for further consolidation of the banking system, arguably a good thing.
Mr. Romeo Bernardo is Global Source Philippine advisor and board member of The Institute for Development and Econometric Analysis, Inc.
Introspective
The latest World Bank Philippines Quarterly Update, Sailing through stormy waters (July 2009), has some good news to tell. Tucked among pages discussing the country's expected poorer economic prospects this year is a box that begins with the conclusion that alert levels on the Philippine banking system have come down over the past six months. This is a relief for many who late last year had been bracing for more contagion from the US financial turmoil.
Transmission of turbulence from developed markets to local shores in the September/October period last year had mainly come through falling prices of dollar-denominated Philippine government securities (popularly called ROPs) that comprise an important portion of bank assets.
Notwithstanding this generally favorable conclusion, the report observes that banks continue to have a large exposure to interest rate risks with about P700 billion, representing 12% of total assets, subject to fair value accounting. For a 100-basis-point increase in spreads on all types of government securities, it is estimated that banks can potentially lose about 50 to 70% of average annual profits on account of lost value from government security holdings.
This consideration provides yet another important reason why Philippine fiscal authorities have been quite cautious in joining full steam the fiscal stimulus bandwagon. The other reasons being the more generally known effect of high interest rates (and thus debt service) in crowding out essential public social and infrastructure spending, and in discouraging private investments and job creation. (Finance officials have been emphatic on their having a medium-term fiscal program that tries to bring back the debt-to-GDP ratio to a downward trajectory by steadily bringing the deficit from 3.2% of GDP [P250 billion] this year, back to near balance by 2013.)
The World Bank Quarterly update likewise observes that concerns over market and liquidity risks have given way to worries about credit risk that follows weaker economic prospects. Bankers I've talked to tell me that they are already seeing upticks in default rates in industries that have been directly affected by the economic downturn. These include exporters and overseas workers and their families who have taken out loans to purchase homes in the Philippines. Of the two, housing loans appear to be more worrisome as this has been an important growth area in past years, having benefited from the rapid remittance growth.
Nevertheless, the continuing growth in remittances offer comfort (as well as the fact that Filipinos put great store on housing investments and can be expected to keep up mortgage payments - even dipping into savings - for as long as possible).
While the entire real estate sector is being watched closely for potential problems, a collapse similar to what happened in the aftermath of the 1997 Asian crisis can be ruled out; most real estate companies today are profitable with relatively low debt ratios.
Some of the big real estate firms, e.g., Ayala Land, Megaworld, have also started to rely less on banks for financing, instead tapping lenders directly with bond issuances. Any remaining bank financing had been done against company balance sheets rather than project cash flows, adding a layer of protection for banks. Meanwhile, a new mode of housing finance, based on developers' contracts to sell, have been done with recourse to developers, minimizing risk to banks.
Apart from real estate, another area which has shown dramatic growth in bank exposure has been the power sector. This is driven in part by real need to invest in capacity after years of under-investment in this sector, and in part by financing for the acquisition of plants being privatized by government.
By and large the lending has been to borrowers with good credit rating and good track records in operating in this industry. What is needed to make sure these chunky loans perform well is the maturing of the regulatory environment. This includes, the functioning of the Energy Regulatory Board, so that it's rate setting does not get politicized (even as we enter a political season), and tweaking the operations of the Wholesale Electricity Spot Market (WESM) to more fully reflect true electricity supply/demand conditions. (Ditto for loans to the water sector and the sometimes idiosyncratic regulatory regime governing it.)
Another somewhat related and more long-term concern is increased concentration of lending to conglomerates, something that the World Bank report also mentioned.
An example of this is San Miguel's venture into regulated industries such as oil, power, and water that require lumpy investments that need to be financed.
Although a large chunk has been borrowed from the capital markets, banks have also bought these bonds adding to their exposures to San Miguel. While the single borrower's limit mitigates against concentration risk, banks will increasingly find it hard to find other lending outlets to diversify risk.
The report further observes that risks that may eventuate in a scenario of low growth are drags on banks' earnings resulting from a more difficult operating environment that will see banks' interest rate margins squeezed, loan growth decelerating, and cost of lending rising.
This setting may also test the appropriateness of individual bank capital in terms of covering unexpected losses and/or higher risk taking. While the big banks may have no problem raising capital in the current environment of high liquidity, the smaller banks may find it more difficult - and could result in pressure for further consolidation of the banking system, arguably a good thing.
Mr. Romeo Bernardo is Global Source Philippine advisor and board member of The Institute for Development and Econometric Analysis, Inc.
Thursday, July 16, 2009
Welcome Remarks, 10th FVR_RPDEV Lecture
By
Romeo L. Bernardo (for RFO Center for Public Finance and Regional Cooperation)
Good afternoon distinguished speakers and guests. Welcome to the 10th RPDEV Lecture Series.
I have been asked by my former boss and still friend, Bobby de Ocampo to deliver the welcome remarks on his behalf as a member of the Board of Advisers of the RFO Center, as he had to travel on urgent business.
Let me start by quoting something he said over a decade ago when he received the highly esteemed recognition of Euromoney Finance Minister of the Year in 1996, explaining the hard tasks of a Finance Secretary--- “ A Finance Secretary has many difficult and important decisions he has to make—the most critical by far being --- which president to serve.”
He has decided most wisely—( Pause for applause.. “palakpak naman diyan” ! ;^)
The nation is at that threshold when we need to decide whom to choose to lead us. But even before then we need to ensure first of all that we do have credible and orderly elections in 2010 that will allow us to renew our faith in democracy and to chose our leaders.
At this time of unprecedented global financial and economic challenge and domestic divisiveness and failures in governance, perhaps at no time in our history do we need visionary and effective leadership as do we do today. Such kind of leadership was defined in a paper documenting the Political Economy of Reform during the Ramos Administration ( Growth Commission, World Bank, 2008) as one, like PFVR’s, able “to set the vision, rally the people to bring results in ways that are possible to accomplish at the time given and openings available and working through weak institutions and contending with strong vested interests.
This is the third time RPDEV and the RFO Center are working together to ensure that our common advocacy of an informed public sector is realized. Past Lectures have tackled issues concerning our development post 1997 Asian financial crisis and global financial situation relative to the current crisis. .
Today we have brought together 6 people whom you perceive as potential leaders of our country. We will listen to what they have to say on socio-economic development and prospects for peace. Our speakers have consistently been mentioned as possible “presidentiables” in the forthcoming 2010 elections.
(We look forward to listening to and interacting with them, even though some may believe that it is useless to try to hold people to anything they say when they are madly in love, drunk or running for office. )
Now with all seriousness, allow me to formally welcome all of you to the 10th FVR-RPDEV Lecture.
I turn you over to our Moderator, Atty Mike Toledo, Country President of Webershandwick Worldwide, our co-sponsor-- to begin the Presentation Proper.
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